Tax in Family Law settlements: CGT and Division 7A

Why tax structuring at the point of settlement can save or cost  hundreds of thousands of dollars

Many separating couples treat a property settlement as a purely legal event. They divide the assets, agree a split, sign the orders and consider the matter closed. The tax consequences often arrive later,  sometimes years later and when an asset is sold and a capital gains tax liability crystallises that the settlement never accounted for.

For clients whose asset base includes investment properties, company shares, trust interests, business goodwill and superannuation, tax is not a peripheral concern. It determines what each party actually walks away with. This article addresses the issues that most often reshape the real value of a settlement: capital gains tax on investment property, including how the 2025 amendments to the Family Law Act have changed the way an uncrystallised CGT liability is treated, the CGT rollover available on court-ordered transfers, the Division 7A risks that arise where private company structures are involved, and the tax treatment of superannuation splits.

Capital gains tax on investment property: deduction, or future contingency?

The recurring question in any settlement involving appreciated investment property is whether the CGT that will eventually be payable on sale should be brought to account now as a deduction from the asset’s value or treated as a future contingency that merely informs the overall result.

The starting point remains Rosati & Rosati (1998) FLC 92-804. The Full Court held that CGT is not automatically deducted from an asset’s value. Whether it is recognised depends on a fact-specific assessment of:

• the likelihood of the asset being sold in the foreseeable future;

• the method of valuation applied;

• the circumstances in which the asset was acquired; and

• the overall justice of the outcome.

Where the Court orders a sale or is satisfied that a sale is inevitable or likely in the near future, allowance is generally made for the CGT. Where a sale is speculative, it is not. The Full Court reaffirmed that framework in Marlin & Henson [2025] FedCFamC1A 71, stressing that Rosati is not a code but a guide to discretion and that the greater the certainty and immediacy of a CGT liability, the greater the need to take it into account. On the facts, the deduction was refused: the party asserting a $3.3 million CGT liability also insisted on retaining the very properties he claimed he would sell. His intention to sell was not made out, so the liability stayed out of the pool.

What has changed: the 2025 amendments and Shinohara

The Family Law Amendment Act 2024 (Cth) substantially rewrote s 79, with the key provisions commencing on 10 June 2025. Section 79(3) now directs the Court to identify the existing legal and equitable rights, interests and liabilities of the parties. In Shinohara & Shinohara [2025] FedCFamC1A 126 the first appellate decision to interpret the amended section, the Full Court confirmed that only what exists at the time of trial belongs on the balance sheet. Items that no longer exist, or do not yet exist as a present liability, cannot be included in the pool but can be dealt with as a current and future circumstance under s 79(5).

A CGT liability that has not crystallised is, by definition, not an existing liability: it becomes payable only on a future CGT event.

If you want CGT recognised as a real liability in your settlement, you need real evidence of a real intention to sell, an executed agency agreement, documented marketing activity, or, for a company-held asset, a board resolution authorising the sale together with admissible expert evidence of the amount of the liability. A speculative accountant’s calculation, without that evidentiary foundation, will now more readily be treated as a s 79(5) contingency than as a deduction from the pool.

The CGT rollover: the relief most clients don’t use strategically

One of the most valuable and most underused provisions at the intersection of tax and family law is the CGT rollover available on relationship breakdown. Under s 126-5 of the Income Tax Assessment Act 1997 (Cth), a transfer of an asset between spouses, or from a company or trust to a spouse, may qualify for rollover relief where it is made under a court order or binding financial agreement.

The effect is that the transfer does not trigger a CGT event. No gain is recognised at settlement. The asset passes with its original cost base intact, and the CGT liability is deferred until the receiving party’s future disposal that party steps into the transferor’s shoes for CGT purposes.

The structuring implications are significant. Consider a spouse retaining a residential investment property with a cost base of $400,000 and a market value of $1.2 million. A forced sale to fund the settlement would trigger CGT on an $800,000 gain  at least $170,000 at the top marginal rate. With rollover on the transfer, no tax is payable at settlement, cash flow is preserved, and the property continues to grow in the retaining party’s hands.

Structuring can go further. Where one party holds available capital losses from a share portfolio, a closed business or a prior CGT event, directing assets with embedded gains to that party can offset the gain on ultimate disposal. Equally, where one party is likely to be on a lower marginal rate at the time of a future disposal (for example, after retirement), allocating a high-gain asset to them reduces the eventual tax cost to the family as a whole. These strategies depend on detailed financial modelling before settlement is finalised.

The rollover is not unlimited. It applies only to assets transferred as a consequence of the breakdown, and only where the transfer occurs under a court order or binding financial agreement. Informal arrangements do not qualify.

Division 7A: the hidden risk in business settlements

For spouses who hold business interests through private companies, Division 7A of the Income Tax Assessment Act 1936 (Cth) introduces a risk that can ambush an otherwise well-structured settlement.

Division 7A treats certain payments, loans and forgiven debts from a private company to its shareholders or their associates as unfranked dividends, taxable at the recipient’s marginal rate. In a family law context, the risk arises on the transfer of a shareholder loan account, the forgiveness of a company debt owed by one spouse, or the extraction of funds from a private company to fund a payment to the other spouse.

If a company makes a payment to a spouse who is an associate of a shareholder even if pursuant to a property settlement and that payment does not comply with Division 7A (a complying loan agreement, with minimum repayments and an arm’s-length interest rate), it may be deemed an unfranked dividend. The resulting tax can be far larger than anticipated, quietly reducing the value of what that party receives.

The answer is advance planning. Where private company structures are involved, the settlement should be modelled with a tax adviser before any orders are made. Options such as declaring a dividend to both shareholders before settlement, using a complying loan agreement, or transferring shares rather than cash may materially reduce the tax cost.  The availability of these options narrow considerably once orders have been made and transfers are underway.

Superannuation splits: a tax treatment often overlooked

Superannuation splitting orders under the Family Law Act allow one spouse’s superannuation interest to be split to the other’s fund. The tax treatment is generally favourable: the split does not trigger a CGT event and is not treated as a contribution for the receiving spouse. But the treatment of the underlying fund particularly a defined benefit interest, or a self-managed fund with embedded unrealised gains should be assessed before any split is agreed.

For parties with significant balances in accumulation phase, and with the transfer balance cap limiting what can be held in retirement phase, the allocation of superannuation interests interacts directly with each party’s long-term tax position. This is an area for specialist advice from an adviser fluent in both family law and superannuation.

The tax checklist for a property settlement

Before finalising any settlement involving significant assets, the tax position should be worked through with advisers before the parties commit to who keeps which assets, how liabilities are allocated, and whether any transfer will trigger, defer or shift a future tax burden.

In the event you are separating, Fiona Hoad and the family law team at Bartier Perry can provide you with sound legal advice in relation to a fair property settlement and highlight any potential tax consequences that may arise.

Author: Fiona Hoad

This publication is intended as a source of information only. No reader should act on any matter without first obtaining professional advice. 

Key references

Rosati & Rosati (1998) FLC 92-804   |   Marlin & Henson [2025] FedCFamC1A 71   |   Shinohara & Shinohara [2025] FedCFamC1A 126   |   Family Law Act 1975 (Cth) ss 79(3)–(5); Part VIIIB (superannuation splitting)   |   Income Tax Assessment Act 1997 (Cth) s 126-5 (CGT rollover)   |   Income Tax Assessment Act 1936 (Cth) Div 7A